Brazil eyes shipyards to dodge oil curse

Brazilian politicians are bickering over future revenues from massive offshore oil discoveries, but cities like Rio Grande have already secured the most important benefits of that wealth -- thousands of jobs building offshore equipment. The sprawling Rio Grande Shipyard in the blustery southern tip of Brazil this year will begin building billions of dollars worth of specialized platforms for state oil company Petrobras to pump crude from deep sea fields, helping create as many as 17,000 local jobs within 10 years.
The shipbuilding push is part of Brazil's broad effort to drive oil revenues into economic development. The country will also create a fund for oil revenues and require that companies acquire equipment locally.
The South American nation is trying to avoid "the oil curse" -- a set of problems linked to other oil economies where a rush of energy revenue has made other domestic industries uncompetitive by pushing up prices and exchange rates.
Critics of the strategy warn that using domestically built ships and oil rigs will be much more expensive than importing them, but government leaders insist the price is worth paying to ensure oil wealth is used productively.
"The concern is that Brazil will soon be bringing in a large amount of money from the oil industry that could cripple other industries," said Sergio Lindenberg of engineering firm WTorre that is completing the shipyard.
"The government is wisely insisting that the platforms be built here, which is going to stimulate the domestic economy."
Oil cash flooding into government coffers is a quandary many countries would love to have, but it brings problems too. Venezuela depends on oil for more than 90 percent of its exports. In Nigeria, oil has been at the center of a guerrilla war for decades.
Vowing Brazil will not suffer the same fate, President Luiz Inacio Lula da Silva has launched a program to invest oil revenues in reviving Brazil's once-vibrant shipbuilding business, making the country a naval equipment producer to rival global shipbuilding giants Singapore and South Korea.
"Petrobras, which didn't have a way to make a platform in Brazil, now is doing so, creating employment for Brazilians," Lula said during a recent televised speech.
Petrobras will tap domestic shipyards to build 28 of the 40 deep-water rigs it will need for the offshore push along with at least 12 floating production platforms and a host of tankers to transport crude and fuel and support boats to service the floating platforms.
This will help steer much of Petrobras' $119 billion in exploration and production investments over the next five years toward local companies, and help expand shipbuilding capacity.
Shipbuilding boom
In the city of Rio Grande, a a 295-foot (90-metre) crane, visible from miles around, towers over Latin America's largest dry dock -- an open oceanside area where ships or drilling rigs are built. The area can be flooded to test the seaworthiness of the vessels built there.
This year the dry dock is slated to begin construction of eight offshore platforms that can pump oil from deep below the ocean floor while floating on the surface.
Government incentives and long-term demand for marine exploration vessels have spurred a rush among Brazilian companies building 17 shipyards almost entirely for oil and gas production, according to Brazil's shipbuilding association Sinaval.
The fever swept up Brazilian billionaire Eike Batista, owner of the EBX industrial conglomerate. This year he launched an IPO for his OSX shipbuilding startup, though he had to scale back the offer after investors balked at buying into a project that was still not built.
"The oil that Brazil has already discovered can support a shipbuilding industry, and the best part is that the market is right here -- so for the love of God, we have to do this!" Batista said in an interview at the Reuters Latin American Investment Summit in May.
RISKY WATERS
The strategy is not without risks. Domestically producing the equipment will likely be much more expensive than importing it, and delays by new and inexperienced shipyards in delivering equipment could slow Brazil's offshore push.
A Morgan Stanley report from late 2009 estimates the cost of building the ships in Brazil could be as much as double the price Petrobras would pay if it bought them abroad.
Analysts also warn the industry faces a glut of ships on the market because investors watching the growth of China's commodities imports have made big bets on shipyards for years.
Petrobras' most spectacular accident, the 2001 sinking of the P-36 platform in shallow waters, was later linked to poorly run bidding processes that let an inexperienced shipbuilder provide shoddy equipment -- an increasingly evident liability in the wake of the BP Gulf of Mexico accident.
Brazil has improved safety standards since that incident, and maintains economic development benefits outweigh the risks of its shipbuilding program over the long haul. In addition, a stronger shipbuilding sector also could build ships for the country's booming exports of commodities such as soy and beef.
To address a lack of qualified personnel, a state-backed program has begun training unemployed workers in shipbuilding skills such as welding and construction of scaffolding.
One recently opened shipyard in northeastern Brazil retrained former sugar cane cutters and out-of-work farm laborers to build and operate the facility.
Fabiani Veleda, 28, a native of Rio Grande who for three years struggled to find a job in the city's tough economy, now works full time in the Shipyard after training to be a welder.
"There's no better way to use those oil revenues," she said in the shipyard offices, donning a hard hat, safety glasses and a jumpsuit to protect herself from biting winds that come off the sea. "This program gave me a new career and a new life."